Proposed money market mutual fund rules draw fire

— -- The Securities and Exchange Commission is considering proposals they say will make money market mutual funds safer — and the mutual fund industry loathes them.

Money market funds, unlike bank money market accounts, are uninsured mutual funds that invest in high-quality, short-term debt issued by the government, corporations and municipal entities. The funds have $2.6 trillion in assets. The two proposals, each considered an alternative to the other, will be put out for public comment in late March or early April.

•Money funds would abandon the accounting convention that lets them keep share prices at a constant $1. The change would drive home the point to investors that money funds aren't federally insured, thus discouraging panic if a fund's share price fell below $1 — breaking the buck, in fund parlance.

Money funds already have to calculate and disclose their "shadow net asset value" — what the share price would be if each security were priced each day as a stock fund's is. For example, the Fidelity Cash Reserves money fund had a shadow price of $1.0002 on Nov. 30, according to a filing with the SEC. You can find a money fund's shadow price by looking at form N-MFP via the SEC's Edgar system.

The change could make every money fund transaction into a taxable event, forcing investors to calculate miniscule gains and losses in share prices, the fund industry argues. And institutional investors don't like the risk of losing money. "One company treasurer told me, 'If I don't get a dollar in and a dollar out, you don't get my dollar,' " says Paul Stevens, CEO of the Investment Company Institute, the funds' trade group.

•Money funds would have to keep a capital reserve in case of large redemptions. They would also put a 30-day hold on 3% to 5% of an account — a move also aimed at discouraging massive redemptions.

Stevens argues that funds would have a hard time raising capital when yields are an average 0.02%, as they are now. And the 30-day hold could cause problems from brokers and other intermediaries, he says.

Why the extra rules? One of the darkest moments of the 2008 financial meltdown was when the Reserve fund, one of the oldest money funds, broke the buck because of its large holdings of short-term IOUs issued by Lehman Bros.

Investors, particularly institutional investors, fled the fund and the industry, as well. They yanked $310 billion from money funds the week of Sept. 15, 2008 — 15% of the assets in the prime money market category, which can invest in short-term corporate debt. The Treasury and the Federal Reserve had to step in to calm the markets and make sure that banks and corporations could continue to tap the market for short-term loans.

Although the Reserve fund was only the second fund in history to break a buck, mutual fund companies have stepped in to prop up funds more than 100 times since their launch.

The fund industry says that rules passed in 2009 and implemented in 2010 shored up money fund safety dramatically.

Funds now have to make sure that their average holding matures in 60 days or less.

They can also own fewer lower-quality securities and suspend redemptions if the fund breaks a buck.